Group Term Life Insurance Tax Table 2023: A Comprehensive Guide

Group term life insurance is a type of life insurance that provides a death benefit to the policyholder's beneficiaries. The premiums are usually paid by the employer, and the coverage amount is typically a multiple of the employee's annual salary.

The IRS sets limits on the amount of group term life insurance that can be tax-free. For 2023, the tax-free limit is $50,000. This means that any amount above this limit is considered taxable income.

As a result, employers need to report the value of group term life insurance exceeding $50,000 on the employee's W-2 form. This is typically done by calculating the value of the excess coverage using a formula provided by the IRS. The employer must also pay payroll taxes on this excess amount.

The tax implications of group term life insurance can be complex, but understanding the basics is essential for both employers and employees.

If you pay for group-term life insurance coverage over $50,000, report the amount as taxable income for each employee on Form 941 or Form 944.

The taxable portion of the fringe benefit is reported on the employee's Form W-2 in boxes 1, 3, 5, and 12 with code "C".

The amount of taxable income is based on IRS tables reflecting the employee's age, and is generally reasonable.

Group-term life insurance coverage is a "nontaxable fringe benefit" up to $50,000, but if you pay for more than $50,000, include the excess in the employee's taxable income.

This excess is subject to Social Security and Medicare taxes, also known as FICA tax.

You can decide whether you want to withhold federal income tax on coverage over $50,000.

If you pay for the first $50,000 of coverage and offer additional coverage at the employee's expense, do not count their contribution as taxable income.

Here's a summary of the tax implications of group-term life insurance:

The cost of group-term life insurance is set by a table prepared by the IRS, which can result in "phantom income" for older employees.

This means that even if your employer's actual cost is lower than what's listed on the table, your taxable income is determined by the one pre-established in the table.

As a result, the amount of phantom income an older employee could be taxed for is often higher than that which they'd pay for similar coverage under an individual term policy.

The cost of group-term life insurance is typically reasonable, especially for younger employees. Premiums are based primarily on age, which means younger employees pay less for coverage.

The IRS provides a chart to determine the value of coverage to include in an employee's taxable income. This chart shows the cost per $1,000 of life insurance coverage each month, depending on the employee's age.

Here's a breakdown of the costs per $1,000 of coverage per month, based on the IRS chart:

The employer typically covers most or all of the cost of group-term life insurance, making it a valuable benefit for employees.

Offering group-term insurance can be a game-changer for your company. It can improve your employer-sponsored benefits by providing a valuable perk to employees.

Boosting employee retention is a key benefit of group-term insurance. By offering life insurance, you can attract and retain top talent. This is especially true when competing with other companies that offer similar benefits.

Group life insurance can be bundled with other types of insurance plans, making it a cost-effective option. In fact, the inexpensive cost of group life insurance is one reason many employers cover most or all of the cost.

Providing a tax-free incentive is another perk of group-term insurance. You can offer up to a certain amount of tax-free life insurance to employees, making it a valuable benefit.

The yearly cost of coverage per employee can vary significantly depending on their age and the amount of coverage they have.

For younger employees, the cost is relatively low. For example, William's monthly taxable income for insurance was just $3, which translates to an annual taxable income of $36.00.

The cost increases with age, however. Charlotte, who is older, had an annual taxable income of $258.00 for the same amount of coverage.

Here's a rough breakdown of the yearly cost per employee based on age:

Keep in mind that these are just estimates, and the actual cost may vary depending on the specific policy and employer.

Group term life insurance offers a tax benefit to employees, but only up to a certain amount. The IRS allows employers to provide up to $50,000 of group-term life insurance coverage without any federal income tax consequences.

The taxable portion of the benefit is reported on the employee's Form W-2, and is subject to payroll taxes as well as income tax. This amount is based on IRS actuarial tables, and can be a relatively small amount compared to the total coverage.

To qualify for the tax-free benefit, the group life insurance must meet four requirements: the coverage provides a general death benefit, the employer must provide the insurance to at least 10 full-time employees, the coverage must not be biased towards certain employees, and the employer must directly or indirectly carry the policy.

Here's a breakdown of the tax implications:

If an employer offers differing levels of coverage to certain employees, the first $50,000 of coverage may be a taxable benefit to those employees. This is known as a "carve-out" feature, which applies to officers, highly compensated individuals, and 5% or more business owners.

You don't need to worry about reporting group life insurance unless you pay for coverage over $50,000. If you're an employer, you'll report the amount as taxable income for each employee on Form 941 or Form 944, and also on their Form W-2.

The taxable portion of group-term life insurance is reported on the employee's Form W-2 in specific boxes: 1 (Wages, tips, other compensation), 3 (Social Security wages), 5 (Medicare wages and tips), and 12 with code "C".

If you're an employee, you can check your W-2 to see if you have a taxable benefit from your employer-paid group-term life insurance. Look at Box 12 with code "C" - if there's a specific dollar amount, that's the amount of your taxable benefit.

Here's a summary of how to report group-term life insurance tax: